Britain was in economic hell in 2009. After the election a year later, the departing Labour chief secretary to the Treasury, Liam Byrne, left a note to his Conservative successor: "Dear chief secretary, I'm afraid there is no money. Kind regards and good luck!"
Britain indeed seemed broke. It was Germany, not Britain, that was being built up as Europe's great saviour from the deepest recession since the Second World War. Germany's mix of fiscal discipline – austerity, to use its popular term – strong manufacturing and rising exports to high-growth countries like China was being touted as the winning formula.
Today, it is Britain that has emerged as the new champion of Europe while Germany flirts with a fresh recession and its closest trading partners, France and Italy, flop around in a sea of misery. Economists expect Britain to grow by 3 per cent this year, the best performance among the Group of Seven countries. The Bank of England expects 3.5 per cent growth. Unemployment, reported at 6 per cent in August, is dropping far faster than the most optimistic forecasts of last year. A year ago, the jobless rate was 7.7 per cent.
Roll out the bubbly! How did Britain do it?
To be sure, quantitative easing – absent in the euro zone countries – helped. But to listen to the ruling Conservatives, credit has to go to Britain's own version of Teutonic fiscal discipline. George Osborne, the Chancellor of the Exchequer, would insist that Blighty had to take the "hard measures," that is, austerity and great nasty dollops of it. Reining in spending would rebuild market confidence. Sovereign-bond yields would come down, ditto inflation. The spending cuts would finance tax reductions. All in all, austerity would pave the way for a compelling recovery.
That's Mr. Osborne's line and he's sticking to it. Never mind that what he said and what he did were pretty much the opposite. Britain did get a dose of austerity, but it was never as deep as advertised and the good Chancellor has eased up on what little there was. Surprise, surprise – Britain is growing again. If Britain had been put through the austerity wringer, like Greece or Spain, growth probably would have disappeared. The perversity of austerity is that you only know it's working when it undermines growth.
The numbers make a convincing case that austerity-lite was the British Chancellor's secret recipe. Net debt as a per cent of gross domestic product is now 79.1 per cent, up from 77.4 per cent in August, 2013. Government spending is ever higher. In the 2007-08 year, just before the financial crisis, the ratio of spending to GDP was 40.6 per cent. Two years later, it rose to 47 per cent. While this is forecast to fall to 42.5 per cent next year, the figure is still well above the precrisis figure.
How about the budget deficit? That's the amount the government has to borrow to meet the shortfall between current spending and current income (largely tax receipts). Britain's deficit has been one of the highest in Europe since the 2008 crisis year, much higher than debt-soaked Italy's. It peaked out at an astounding 11 per cent of GDP – almost four times the European Union limit – in 2009-10. This year, it's expected to land at 4.6 per cent; only Spain's deficit will be higher. The British government was, and is, a borrowing pig.
So mission accomplished? In a sense, yes. Had Mr. Osborne practised what he preached and shut down spending, growth would no doubt have been lower and unemployment higher, all the more so since wage growth has been pathetic in Britain (real disposable income per capita is still 2.6 per cent below its 2007 peak). Sometimes it makes sense to borrow an ocean of money to keep the economy swimming, all the more so since long-term interest rates are so low. Britain can sell 10-year bonds at 2.25 per cent. That's cheaper than U.S. Treasuries.
Now the bad news. Britain can't keep borrowing forever. With debt rising, it knows it has to take its foot off the spending pedal. It wants to cut spending on goods and services by 9 per cent between next year and 2019. But spending cuts are notoriously hard to accomplish. Who is to get whacked? Teachers, doctors, the military? There is also a good chance that the cuts will come just as British growth goes from trot to walk, or slower. Britain cannot be immune from the pathetic growth in the euro zone, rising sterling and the inevitable hike in interest rates. And if house prices falls, all bets are off for a sustained British economic revival. No country in Europe has seen such a crazy rise in property values.
Still, Mr. Osborne did the right thing by going easy on austerity. As far as the rest of Europe goes, Britain is the wonder economy. That wonder was not made possible by sheer luck or genius. It was common sense what did it, m'lord. When an economy is in recession, you don't make it worse with harsh austerity.
Eric Reguly